Stock investors who've embraced diversification have enjoyed some amazing returns over the long run, despite the turmoil of the past few years. Even some successful investors, however, overlook a big part of the stock market entirely.

Where's that missing link to riches? Think back to your childhood and the fairy-tale story of Goldilocks. In between gargantuan megacap stocks with limited growth potential and tiny small caps with uncertain futures, you'll discover the ultimate "just right" Goldilocks-approved investment: mid-cap stocks. If you take a look at their returns, you'll find that stocks in this range of market capitalization have been a whole lot tastier than lukewarm porridge.

Get in the middle of it all
This month's brand-new issue of Motley Fool Rule Your Retirement includes two full pages of commentary on mid-cap stocks and how you can use them to improve your investment results. As Foolish fund expert Amanda Kish notes, the mid-cap asset class has been the best performer since 1983, handily beating both large-cap and small-cap U.S. stocks as well as international stocks, commodities, and real estate investment trusts. Perhaps even more impressively, they've done so with very little volatility. 2010 has continued the strong performance of mid caps, as they were one of the only classes of stocks to gain ground this year as of the end of August.

So what's behind the perfect fit of mid-cap stocks? On one hand, mid caps have been around long enough to have an extensive track record of performance, so you don't have to worry as much about them flaming out as you do with smaller companies. On the other hand, mid-cap stocks aren't so big that they're facing restraints to further growth. Rather, mid caps are often just entering their fastest phase of development, and it's not too late to pick up big gains with the right mid-cap stocks.

Starting right
If you want a broad selection of mid caps, the ETF SPDR S&P Mid-Cap 400 (NYSE: MDY) gives you hundreds of great stocks in a cheap index strategy.

But to drill down on the best of the best, you need to look further. To find some of the best mid-cap stocks out there, I turned to some of the mid-cap mutual funds that Amanda talks about in her article. Here are the stocks that those funds have been adding most aggressively to their portfolios recently:



Market Cap

Forward P/E

Return on Equity

1-Year Return


$5.77 billion




Annaly Capital Management (NYSE: NLY)

$10.96 billion




Willis Group (NYSE: WSH)

$5.14 billion




Autodesk (Nasdaq: ADSK)

$6.66 billion





$3.04 billion




Ball Corp. (NYSE: BLL)

$5.38 billion




Source: Morningstar, fund websites. Returns and yields as of Sept. 2.

These six stocks represent a pretty reasonable cross-section of the mid-cap world. Strictly speaking, Annaly has just about graduated to large-cap status, but paying out rich dividends -- more than $1.25 billion in 2009 alone -- will help rein in the growth in the REIT's market cap. The others fall squarely in the $1 billion to $10 billion range that defines mid cap stocks.

As you'd expect, the different funds take different approaches toward adding stocks. For value plays, infrastructure engineering company URS and defense contractor SAIC have both taken it on the chin over the past year, as governments have cut back on the large capital expenditures that support their bottom lines. In contrast, Willis Group has grown large enough to rename the former Sears Tower after it, as its insurance brokerage business has seen revenue and earnings growth in the double digits despite the tough environment of the past two years.

Moreover, these stocks still have plenty of potential. Autodesk has risen sharply recently, but still isn't maximizing its earnings from its upgrade cycle. Packaging company Ball Corp. should only see further gains once the economy starts hitting on all cylinders.

Make your portfolio just right
To learn more about how to fit mid caps into your overall investing strategy, don't miss the new issue of Rule Your Retirement. Amanda has plenty of good mid-cap ideas for investors of all ages. A free 30-day trial gives you full access to the entire issue as well as a host of other resources.

Many investors ignore mid-cap stocks, but the right ones can be a perfect addition to your investments. Take a closer look and see whether mid caps would be just right for you.

There's a way to boost your profits from great stocks even further. Fool John Rosevear has a wealth-making move you should jump on now.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Dan Caplinger still wonders how Goldilocks avoided getting eaten. He doesn't own shares of the companies mentioned above. SAIC is a Motley Fool Inside Value pick. The Fool owns shares of Annaly Capital Management and Autodesk, and has also written covered calls on Autodesk. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy can't stand porridge but loves a too-soft bed.